In that scheme, would regulation be based on where the servers are located? What's to stop me from routing American traffic to Armenia, where the laws don't exist? What's to stop me routing it to Russia, where the general legal principle is that illegality won't be pursued if it's no against Russian citizens?
The laws of the country would apply to the objects in that country. If you route traffic from America to Russia, the hosts/clients in America need to follow American laws and the hosts/clients in Russia need to follow Russian laws.